The buyer is proposing a debt-free, cash-free transaction but wants a trailing-twelve-month average net working capital peg that feels artificially inflated. How does the working capital mechanism impact our walk-away proceeds, and how do we defend our peg?

Question

Tyler Smith · Accepted Answer

In a debt-free, cash-free transaction, buyers frequently use the net working capital peg as a back-door mechanism to claw back enterprise value. The working capital peg is the agreed-upon baseline of operating liquidity (current assets minus current liabilities) that you must leave in the company at close to support day-to-day operations without the buyer having to inject fresh cash. If your actual working capital at closing is below the peg, the buyer docks your cash proceeds dollar-for-dollar. If it is higher, they pay you a cash true-up.

The danger lies in how the peg is calculated. Buyers will routinely push for a trailing twelve-month average. If your business is growing rapidly or experiences seasonal swings, a straight twelve-month historical average artificially inflates the peg by incorporating lower historical working capital numbers, creating an automatic deficit at close.

To defend your proceeds, normalize the working capital calculation during the LOI phase. Strip out cash, funded debt, transaction bonuses, and non-operating liabilities. Identify and eliminate aged, uncollectible accounts receivable from the baseline so you are not penalized twice when the buyer writes them off post-close.

If your revenue has grown substantially over the last two quarters, demand a six-month or three-month weighted average peg that mirrors your current operational scale. In your weekly Level 10 Meeting, direct your finance team to track days sales outstanding and tighten inventory turns as an explicit Rock leading up to closing. Controlling working capital is not an accounting exercise; it is direct preservation of your net purchase price.